Obamacare's Two Americas

by Benjamin Domenech on 12:16 pm March 11, 2010

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Here’s the worst thing you probably haven’t heard about President Barack Obama’s health care plan, which he and his allies are about to force through the Congress despite enormous opposition from the American people: it makes everything onetime vice presidential nominee John Edwards once said about the class divide of “two Americas” come true.

The dirty little secret of this plan—which wouldn’t be a secret if opponents of this legislative package weren’t distracted by a dozen other wrongheaded policies in it—is that it will bring a major and irreversible upheaval to America’s labor markets. In a time of economic tension, this plan will displace millions of workers and push more people into becoming contract employees, resulting in increased instability for working families.
One of the many original stated goals of the White House’s health care reforms was the promise that you can keep your health plan if you like it. However, the White House wanted to give businesses much-needed relief from burdensome health costs. Like the desire to create a new entitlement while reducing the budget deficit, these aims are nearly impossible to reconcile, so Obama chose a path that accomplishes neither.

The president’s plan penalizes an employer for not providing insurance, but the government will subsidize the health care of workers without employer-provided insurance. This effectively allows workers to receive the same compensation package they get today, but with government footing the health-benefits part of the bill, so employers have no need to make up the difference in cash.

The economic benefits of that subsidy far outweigh the penalties—for low income workers, it can result in an enormous difference of over $17,000 per year.

It’s obvious what will happen under this plan: it will not make economic sense for any small business which employs lower-income workers to offer health insurance. And any small business which does so will almost certainly fail, burdened by higher costs than their competitors.

This dilemma could be solved by making the penalties more draconian, but that too would cause business failures, and as with the individual insurance mandate, too steep a penalty would make the plan even more coercive and unpopular.

As John Goodman of the nonpartisan National Center for Policy Analysis recently described it, “High-paid workers with employer-paid insurance will cluster in some firms, while average- and below-average-wage workers will cluster in others. Overall, ObamaCare will create irresistible economic pressure to restructure the entire labor market.”

The only likely outcome of this plan will be for companies to drop coverage entirely. Younger, lower-income workers will be eligible for a subsidy and forced into the health exchanges. That will compel them to do something that doesn’t make economic sense. Most young workers don’t use health care much—unless you give them an incentive to over-consume care by paying for it up front for them.

There’s a final step here, though, that’s critical to understand: once those younger and lower-income workers are forced into a system that eliminates rational decision-making, they are made beholden to these taxpayer funded subsidies, and face massive penalties if their income rises such that they lose the subsidies. The marginal tax penalty for an individual moving up from to $40,000 a year to $45,000 is massive, as also for families earning $95,000 versus $90,000, creating an artificial cliff that dramatically penalizes success.

Thus a new picture of Obamacare emerges: it will force people to pay for what they don’t want and purchase what they don’t need, in a massive expansion of the size and power of government. The entire proposal functions not as a method of improving care or lowering premiums but as a massive regressive tax falling disproportionately on the young and those on the lower end of the income scale. And once in place, it will trap its supposed beneficiaries in ways that cannot be undone.

Combine this regressive tax with a massive increase in spending via a government entitlement which will only grow, and you have a recipe for long-term economic stagnation and the permanent enshrinement of two Americas into our national social policy.